ITO 18(1)(2), MUMBAI V. MARKET ANALYSISTS & PRODUCTS PROMOTORS, MUMBAI

ITA 2222/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1348 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 09-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR V ANJANEYULU
• Assessee Lawyers: B R KOTECHA; ASHWIN P MALDE
• Keywords: Question of law; Deemed dividend

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, B, MUMBAI BEFORE SHRI S V MEHROTRA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 2222/MUM/2009 (ASSESSMENT YEAR: 2005-06) INCOME TAX OFFICER, 18(1)(2), ROOM NO.104, PIRAMAL CHAMBERS, PAREL, MUMBAI-400012 .APPELLANT VS M/S MARKET ANALYSISTS AND PRODUCT PROMOTERS CENTURY BHAVAN, 3 RD FL, DR.ANNIE BESANT ROAD, WORLI, MUMBAI-400018. PAN : AAAFJ0334N RESPONDENT APPELLANT BY : DR.V.ANJANEYULU RESPONDENT BY : S/SHRI ASHWIN P MALDE AND B R KOTECHA O R D E R PER VIJAY PAL RAO,JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 17.12.2008 OF CIT(A)-XVIII, MUMBAI FOR THE ASSESSMENT YEAR 2005-06. 2. ONLY ISSUE ARISES FOR OUR CONSIDERATION AND ADJUDICATION, WHETHER IN THE FACTS AND CIRCUMSTANCE S OF THE CASE, THE CIT(A) IS JUSTIFIED IN HOLDING THAT THE LOAN OF ITA NO. 2222/MUM/2009 (ASSESSMENT YEAR: 2005-06) 2 RS.6,65,331/- CANNOT BE TREATED AS DEEMED DIVIDEND U/S 2(22)(E) IN THE HANDS OF THE ASSESSEE. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E AO NOTICED THAT THE ASSESSEE FIRM HAS RECEIVED A LOAN FROM M/S MAPP ADVERTISING PVT.LTD AND THERE IS AN OUTSTANDI NG AMOUNT OF RS.6,56,331/-. ACCORDINGLY, THE AO HAS MADE AN ADDITION OF RS.6,56,331/- UNDER THE HEAD INCOME FROM OTHER SOU RCES AND TREATED THIS AS DEEMED DIVIDEND U/S 22(22)(E) OF THE ACT. 4. ON APPEAL, THE LEARNED CIT(A) HAS DELETED THE A DDITION MADE BY THE AO. 5. BEFORE US, THE LEARNED DR HAS SUBMITTED THAT T HE CIT(A) HAS ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THE TRANSACTIONS BETWEEN THE ASSESSEE AND M/S MAPP ADVERTISING PVT.LTD WERE NOT ONLY LOAN BUT ALSO RECEIPT REGARDING THE SERVICE CHARGES FROM THEM AND ALSO R ECEIVED AS THE INCOME OF THE ASSESSEE WITHOUT EXAMINE THE FACT S AND RECORD. HE HAS RELIED UPON THE ORDER OF THE AO. 6. ON THE OTHER HAND, THE LEARNED DR HAS SUBMITTED THAT THERE ARE NOT ONLY FINANCIAL TRANSACTIONS BUT ALSO BUSINESS TRANSACTIONS BETWEEN THE ASSESSEE AND M/S MAPP ADVE RTISING PVT.LTD. HENCE, THERE ARE TWO SEPARATE ACCOUNTS BET WEEN THE ASSESSEE AND M/S MAPP ADVERTISING PVT.LTD. ONE IS LOAN ITA NO. 2222/MUM/2009 (ASSESSMENT YEAR: 2005-06) 3 ACCOUNT AND ANOTHER IS SERVICE CHARGE ACCOUNT. THE PAYMENT OF RS.9,00,000/- ON 1.3.2005 WAS A BUSINESS TRANSA CTIONS BEING THE SERVICES PAYABLE BY THEM FOR THE ASSESSME NT YEARS 2004-05 AND 2005-06. HE HAS FURTHER SUBMITTED THAT WHEN THE ASSESSEE IS NOT A SHAREHOLDER OF M/S MAPP ADVERTISI NG PVT. LTD THEN ADDITION CANNOT BE MADE BY TREATING THE L OAN AS DEEMED DIVIDEND U/S 2(22)(E). HE HAS RELIED UPON T HE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN TH E CASE OF BHAUMIK COLOUR (P) LTD. (2009) 118 ITD 1 (MUM.) (SB) AS WELL AS THE DECISION OF JURISDICTIONAL HIGH COURT DATED 22.3.2010 IN THE CASE OF UNIVERSAL MEDICARE PRIVATE LIMITED I N IT APPEAL NO.2264 OF 2009. 7. AFTER CONSIDERING THE RIVAL CONTENTIONS AND RELE VANT RECORD, WE NOTE THAT IT IS NOT IN DISPUTE THAT THE ASSESSEE IS NOT A SHAREHOLDER OF M/S MAPP ADVERTISING PVT.LTD . WE FIND THAT THIS ISSUE IS COVERED BY THE DECISION OF SPE CIAL BENCH OF THIS TRIBUNAL IN THE CASE OF BHAUMIK COLOUR (P) LTD. (SUPRA), WHEREIN THE SPECIAL BENCH VIDE PARAGRAPHS 36 AND 37 HAS HELD AS UNDER : 36. THE BASIS OF BRINGING IN THE AMENDMENT TO SECTION 2(22)(E) OF THE ACT BY THE FINANCE ACT, 1987 W.E.F.1.4.88 IS TO ENSURE THAT PERSONS WHO CONTROL THE AFFAIRS OF A COMPANY AS WELL AS THAT OF A FIRM CAN HAVE THE PAYMENT MADE TO A CONCERN FROM THE COMPANY AND THE PERSON WHO CAN CONTROL THE AFFAIRS OF THE CONCERN CAN DRAWN THE SAME FROM THE CONCERN INSTEAD OF THE COMPANY DIRECTLY MAKING ITA NO. 2222/MUM/2009 (ASSESSMENT YEAR: 2005-06) 4 PAYMENT TO THE SHAREHOLDER AS DIVIDEND. THE SOURCE OF POWER TO CONTROL THE AFFAIRS OF THE COMPANY AND THE CONCERN IS THE BASIS ON WHICH THESE PROVISIONS HAVE BEEN MADE. IT IS THEREFORE, PROPER TO CONSTR UE THOSE PROVISIONS AS CONTEMPLATING A CHARGE TO TAX IN THE HANDS OF THE SHAREHOLDERS AND NOT IN THE HANDS OF A NON SHAREHOLDER VIZ. CONCERN. A LOAN OR ADVANC E RECEIVED BY A CONCERN IS NOT IN THE NATURE OF INCOM E. IN OTHER WORDS THERE IS A DEEMED ACCRUAL OF INCOME EVEN U/S 5(1)(B) IN THE HANDS OF THE SHAREHOLDER ON LY AND NOT IN THE HANDS OF THE PAYEE VIZ.NON- SHAREHOLDER (CONCERN) . SEC.5(1)(A) CONTEMPLATES THAT THE RECEIPT OR DEEMED RECEIPT SHOULD BE IN TH E NATURE OF INCOME. THEREFORE, DEEMING FICTION CAN BE APPLIED ONLY IN THE HANDS OF THE SHAREHOLDER AND NO T THE NON-SHAREHOLDER VIZ.THE CONCERN. 37. THE DEFINITION U/S 2(22)(E) OF THE ACT IS AN INCLUSIVE DEFINITION. SUCH INCLUSIVE DEFINITION ENLARGES THE MEANING OF THE TERM DIVIDEND ACCORDING TO ITS ORDINARY AND NATURAL MEANING TO INCLUDE EVEN A LOAN OR ADVANCE. ANY LOAN OR ADVANCE CANNOT BE DIVIDEND ACCORDING TO ITS ORDINAR Y AND NATURAL MEANING. THE ORDINARY AND NATURAL MEANING OF THE TERM DIVIDEND WOULD BE A SHARE IN PROFITS TO AN INVESTOR IN THE SHARE CAPITAL OF A LIMITED COMPANY. TO THE EXTENT THE MEANING OF THE WORD DIVIDEND IS EXTENDED TO LOANS AND ADVANCES TO A SHAREHOLDER OR TO A CONCERN OR TO A SHAREHOLD ER IN WHICH A SHAREHOLDER IS SUBSTANTIALLY INTERESTED DEEMING THEM AS DIVIDEND IN THE HANDS OF A SHAREHOLDER THE ORDINARY AND NATURAL MEANING OF THE WORD DIVIDEND IS ALTERED. TO THIS EXTENT THE DEFINITION OF THE TERM DIVIDEND CAN BE SAID TO OPERATE. IF THE DEFINITION OF DIVIDEND IS EXTE NDED TO A LOAN OR ADVANCE TO A NON-SHAREHOLDER THE ORDINARY AND NATURAL MEANING OF THE WORD DIVIDEND IS TAKEN AWAY. IN THE LIGHT OF INTENTION BEHIND THE OF SECTIONS 2(22)(E) AND IN THE ABSENCE OF INDICATI ON IN SECTION 2(22)(E) TO EXTEND THE LEGAL FICTION TO A CASE OF LOAN OR ADVANCE TO A NON-SHAREHOLDER ALSO, WE ARE OF THE VIEW THAT LOAN OR ADVANCE TO A NON- SHAREHOLDER CANNOT BE TAXED AS DEEMED DIVIDEND IN THE HANDS OF A NON-SHAREHOLDER 8. WE FURTHER NOTE THAT THE HONBLE JURISDICTIONAL HIGH COURT HAS ALSO CONSIDERED AND DECIDED THIS ISSUE IN THE CASE OF CIT ITA NO. 2222/MUM/2009 (ASSESSMENT YEAR: 2005-06) 5 V/S UNIVERSAL MEDICARE PRIVATE LIMITED IN (SUPRA) AND VIDE PARAGRAPH 9 OF ITS ORDER HAS HELD AS UNDER : 9. IN ORDER THAT THE FIRST PART CLAUSE (E) OF SECTION 2(22) IS ATTRACTED, THE PAYMENT BY A COMPANY HAS TO BE BY WAY OF AN ADVANCE OR LOAN. THE ADVANCE OR LOAN HAS TO BE MADE, AS THE CASE MAY BE EITHER TO A SHAREHOLDER BEING A BENEFICIAL OWNER HOLDING NOT LESS THAN TEN PER CENT OF THE VOTING POWER OR TO ANY CONCERN TO WHICH SUCH A SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST. THE TRIBUNAL IN THE PRESENT CASE HAS FOUND THAT AS A MATTER OF FACT NO LOAN OR ADVANCE WAS GRANTED TO THE ASSESSEE, SINCE THE AMOUNT IN QUESTION HAD ACTUALLY BEEN DEFALCATED AND WAS NOT REFLECTED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE FACT THAT THERE WAS A DEFALCATION SEEMS TO HAVE BEEN ACCEPTED SINCE THIS AMOUNT WAS ALLOWED AS A BUSINESS LOSS DURING THE COURSE OF ASSESSMENT YEAR 2006-07, CONSEQUENTLY, ACCORDING TO THE TRIBUNAL THE FIRST REQUIREMENT OF THERE BEING AN ADVANCE OR LOAN WAS NOT FULFILLED. IN OUR VIEW, TH E FINDING THAT 8 THERE WAS NO ADVANCE OR LOAN IS A PURE FINDING OF FACT WHICH DOES NOT GIVE RISE TO ANY SUBSTANTIAL QUESTION OF LAW. HOWEVER, EVEN OR THE SECOND ASPECT WHICH HAS WEIGHED WITH THE TRIBUNAL, WE ARE OF THE VIEW THAT THE CONSTRUCTION WHICH HAS BEEN PLACED ON THE PROVISIONS OF SECTION 2(22)(E) INCLUDES A PAYMENT MADE BY THE COMPANY IN WHICH THE PUBLIC IS NOT SUBSTANTIALLY INTERESTED B Y WAY OF AN ADVANCE OR LOAN TO A SHAREHOLDER OR TO ANY CONCERN TO WHICH SUCH SHAREHOLDER IS A MEMBER OR PARTNER, SUBJECT TO THE FULFILLMENT OF THE REQUIREMENTS WHICH ARE SPELT OUT IN THE PROVISION. SIMILARLY, A PAYMENT MADE BY A COMPANY ON BEHALF, OF FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER IS TREATED BY CLAUSE (E) TO BE INCLUDED IN THE EXPRESSION DIVIDEND. CONSEQUENTLY, THE EFFECT OF CLAUSE (E) OF SECTION 2(22) IS TO BROADEN THE AMBIT OF THE EXPRESSION DIVIDEND BY INCLUDING CERTAIN PAYMENTS WHICH THE COMPANY HAS MADE BY WAY OF A LOAN OR ADVANCE OR PAYMENTS MADE ON BEHALF OF OR FOR THE INDIVIDUAL BENEFIT OF A SHAREHOLDER. THE DEFINITIO N DOES NOT ALTER THE LEGAL POSITION THAT DIVIDEND HAS ITA NO. 2222/MUM/2009 (ASSESSMENT YEAR: 2005-06) 6 TO BE TAXED IN THE HANDS OF HE SHAREHOLDER. CONSEQUENTLY IN THE PRESENT CASE THE PAYMENT, EVEN ASSUMING THAT IT WAS A DIVIDEND, WOULD HAVE TO BE TAXED NOT IN THE HANDS OF THE ASSESSEE BUT IN THE HANDS OF THE SHAREHOLDER. THE 9 TRIBUNAL WAS IN THE CIRCUMSTANCES, JUSTIFIED IN COMING TO THE CONCLUSION, THAT IN ANY EVEN, THE PAYMENT COULD NOT BE TAXED IN THE HANDS OF THE ASSESSEE. WE MAY IN CONCLUDING NOTE THAT THE BASIS ON WHICH THE ASSESSEE IS SOUGHT TO BE TAXED IN THE PRESENT CASE IN RESPECT OF THE AMOUNT OF RS.32,00,000/- KLIS THAT THER WAS A DIVIDEND UNDER SECTION 2(22) (E) LAND NO OTHER BASIS HAS SUGGESTED IN THE ORDER OF THE AO HENCE, IN VIEW OF THE SPECIAL BENCH DECISION AS WE LL AS THE JURISDICTIONAL HIGH COURT DECISION, WE DECIDE THIS ISSUE AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE S TANDS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 24.06.2010 SD SD (S V MEHROTRA ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 24 TH JUNE 2010 SRL:4510 ITA NO. 2222/MUM/2009 (ASSESSMENT YEAR: 2005-06) 7 COPY TO: 1. INCOME TAX OFFICER, 18(1)(2), ROOM NO.104, PIRAMAL CHAMBERS, PAREL, MUMBAI-400012 2.M/S MARKET ANALYSISTS AND PRODUCT PROMOTERS CENTURY BHAVAN, 3 RD FL, DR.ANNIE BESANT ROAD, WORLI, MUMBAI-400018. 3. CIT-MC XVIII, MUMBAI 4. CIT(A)XVIII, MUMBAI 5. DR B BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI